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Why Ford's Operating Profit Dropped 28% in 2018

Overseas woes are just part of the story.

Ford Motor Company (NYSE:F) posted a loss of $116 million for the fourth quarter, more than explained by an accounting charge related to its pensions. But the company said that its fourth-quarter operating income, excluding the pension charge and other one-time items, dropped 28% from a year ago to $1.5 billion on sharp declines in China and Europe. Ford's full-year operating profit, excluding one-time items, also fell 28% to $7 billion.

On a per-share basis, excluding one-time items, Ford earned $0.30 in the fourth quarter and $1.30 for the full year. Both were down from Ford's results a year ago, in line with the preliminary numbers Ford released last week.

Once again, Ford sold lots of F-Series pickups at good prices in the U.S. in 2018. Those profits helped Ford overcome challenges in other parts of the world. Image source: Ford Motor Company.

Ford's fourth quarter in a nutshell

On balance, Ford sold a richer mix of vehicles at better prices than it did in the fourth quarter of 2017. But higher costs for key commodities, the costs of the ongoing Takata airbag recall, and losses at Ford's Chinese joint ventures (which saw a steep decline in sales) more than offset the good news.

Ford also had to take a whopper of a one-time charge, $877 million, after December's stock market decline left it with hefty on-paper losses in its pension portfolios as of year-end. That charge was the reason for Ford's fourth-quarter net loss.

How Ford's business units performed

Here's a look at how each of Ford's business segments performed. Note that all financial results in this section are reported on an EBIT basis, except as noted.

North America: Ford earned $2 billion in North America in the fourth quarter, up from $1.8 billion a year ago, as improvements in the mix of products it sold (more SUVs and trucks relative to cars) and net pricing were enough to offset higher commodity costs and spending on recalls.Ford's EBIT margin in North America was 7.6%, up from 7.3% a year ago.

For the full year, Ford earned $7.6 billion in North America, down from $8.1 billion in 2017.

South America: Ford lost $199 million in South America in the fourth quarter, about $10 billion worse than a year ago. Ford was able to get significant net pricing gains (an improvement of $270 million from a year ago), but those were more than offset by weaker local currencies and the effects of inflation.

For the full year, Ford lost $678 million in South America, an improvement of $75 million from 2017.

Europe: Ford lost $199 million in Europe in the fourth quarter, down from an $89 million profit in the year-ago period. Once again, Ford was able to win pricing gains on the strength of several new products, but those gains were more than offset by unfavorable exchange-rate movements and higher costs, including costs related to the launch of the all-new Focus in the region.

For the full year, Ford lost $398 million in Europe, down from a $367 million profit in 2017.

Middle East and Africa: Ford lost $49 million here in the fourth quarter, an improvement of $17 million from the year-ago period. Lower costs and pricing gains accounted for the improvement.

For the full year, Ford lost just $7 million in the region in 2018, a significant improvement over the $246 million loss it posted a year ago.

Asia Pacific: Ford lost $381 million here in the fourth quarter, down from a $30 million profit in the year-ago period. This region's results include Ford's joint ventures in China, as well as its operations in India, Southeast Asia, and Oceania. The story in the fourth quarter: China did badly, the rest did well. Ford lost $534 million in China, while the rest of the region posted a $153 million profit.

For the full year, the region lost $1.1 billion: a $1.54 billion loss in China, a $444 profit in the rest of the region.

Mobility: Ford's mobility segment, which includes its autonomous-vehicle effort and its Ford Smart Mobility initiatives, lost $195 million in the fourth quarter, down from $100 million a year ago. The story is simple: Ford has ramped up its spending on both fronts.

For the full year, mobility posted a loss of $674 million, versus a $299 million loss in 2017.

Ford Credit: Profit before tax for Ford's captive-financing unit was $663 million in the fourth quarter, up from $610 million a year ago. Ford credited "favorable lease residual performance" for much of the improvement -- Ford's off-lease cars are getting good prices at used-car auctions.

For the full year, Ford Credit earned $2.63 billion, up from $2.31 billion in 2017.

The costs of launching an all-new Focus hurt Ford's results in Europe in 2018, but it should help Ford do better in 2019. Image source: Ford Motor Company.

About those big one-time charges

Ford took a total of $1.179 billion in one-time charges in the fourth quarter. Much of that -- $877 million -- consisted of noncash charges related to Ford's annual pension revaluation, as noted above. The remainder included $262 million in charges related to departing employees, and a charge of $40 million for the shutdown of Ford's Chariot shuttle-bus service.

Debt, liquidity, and guidance

Ford ended 2018 with $23.1 billion in cash available to its automotive business, down from $26.5 billion at the end of 2017. It had an additional 11.1 billion in available credit lines, for total liquidity of $34.2 billion. Against that, it had $14.1 billion in well-structured long-term debt, down from $16.5 billion at the end of 2017.